The cost of health care is one of the biggest challenges facing the United States, and, as most people know from experience, drug prices are a growing part of the problem. Although drug spending represents only 12 percent of total health costs, it is rising at an annual rate of 10 to 12 percent--more than four times the rate of inflation--and will soon overtake physician fees as the second largest part of the health-care bill, after hospitalization costs. Why is this happening? Unlike other advanced countries, the United States doesn't regulate drug costs. Private insurers bargain with manufacturers for discounts on the medicines they cover, but the drug industry has long stymied such efforts by the federal government. The result is that Americans pay roughly twice as much as Canadians or Europeans for brand-name medications. The problem is reaching crisis proportions--and without bold reforms, it will get worse.

The pharmaceutical industry claims that high prices are necessary to cover its research-and-development costs. The truth is that in 2002, the top 10 American drug companies had a median profit margin of 17 percent, compared with less than 3.1 percent for the other Fortune 500 industries. With that record, the pharmaceutical industry can hardly claim that it is struggling to finance medical progress. The major drug companies spend less on R&D than they keep in profits, and far less than they spend on marketing and administration.

The industry also justifies its high prices by claiming it turns out a steady stream of life-saving miracle drugs. But this industry engages in much less innovation than its ads claim. Of the 78 drugs approved by the Food and Drug Administration in 2002, only 17 were new chemical compounds, and only seven of those were classified by the FDA as likely improvements over drugs already on the market. (None of these seven came from a big U.S. drug company.) The few innovative drugs the industry does bring to market usually stem from research done at government or university labs. When experts at the National Institutes of Health analyzed the research behind the five top drugs of 1995, they found that only one of 17 key studies came from the company that sold the drug.

Most of the new drugs now being produced--including many of the top-selling treatments for arthritis, depression, high blood pressure and elevated cholesterol--are just minor variations on older ones. Drug companies insist that these "me too" drugs create competition to keep prices down, but there is no evidence for that claim. The industry also claims that me-too drugs provide backups in case a patient doesn't respond well to a drug already on the market. But pharmaceutical companies rarely test that claim by studying new drugs in people who have not responded to similar ones.

What will happen to drug prices in the future? No one can afford the skyrocketing costs--not consumers, not employers, not the state Medicaid programs and not the deficit-ridden federal government. But reform is unlikely in the current political climate. Instead of looking for ways to control U.S. prices, the Bush administration is now pressuring other countries to ease regulations so that their prices can rise to U.S. levels. Mounting expenditures on drugs come from increased use as well as higher prices, and though private insurers and state Medicaid programs are encouraging the use of cheaper generics and getting some price concessions on the costly patented brands, the industry is using direct-to-consumer advertising to stimulate new demand.

Public pressure may soon force the government to allow drug imports from Canada and Europe, but imports can't sustain a country this large. A more important step toward controlling drug costs is to break the medical profession's dependence on the industry for instruction in the use of pharmaceutical products. Doctors are bombarded with gifts, promotions and "educational" programs designed to convince them that costly new drugs are better than cheaper, older ones. If physicians took responsibility for their own education, and relied on published scientific studies rather than sales pitches, they would prescribe fewer and more-cost-effective drugs. Patients would come out ahead, and so would the country.

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